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Tax Avoidance and Tax Havens; Undermining Democracy — Global Issues

Summarize this content to 500 words Author and Page informationby Anup ShahThis page last updated Monday, January 07, 2013This page: print all information (e.g. expanded side notes, shows alternative links), use the print version: We might not like the idea of paying taxes, but without it, democracies will struggle to function, and will be unable to provide public services. This affects both rich and poor nations, alike.Individuals and companies all have to pay taxes. But some of the world’s wealthiest individuals and multinational companies, able to afford ingenious lawyers and accountants, have figured out ways to avoid paying enormous amounts of taxes. While we can get into serious trouble for evading payment of taxes, even facing jail in some countries, some companies seem to be able to get away with it. In addition, if governments need to, they tax the population further to try and make up for the lost revenues from businesses that have evaded the tax man (or woman).Why would companies do this, especially when some of them portray themselves as champions of the consumer? The reasons are many, as this article will explore. In summary, companies look for ways to maximize shareholder value. Multinational companies are in particular well-placed to exploit tax havens and hide true profits thereby avoiding tax. Poor countries barely have resources to address these — many have smaller budgets than the multinationals they are trying to deal with.Yet, companies and influential individuals also pour lots of money into shaping a global system that they will hope to benefit from. If the right balance can’t be achieved, not only will attempts to avoid taxation and other measures undermine capitalism (which they claim they support) they will also undermine democracy (for even responsible governments may find it hard to meet the needs of their population).On this page:Corporate WelfareCorporate CrimeTax AvoidanceThe scale of tax avoidanceWhy is tax revenue important?Why don’t poor countries raise sufficient tax revenues?What are the impacts of tax havens on poor countries?Why have tax havens in the first place and who benefits?How much money is held in offshore tax havens?How much potential tax revenue is lost through off-shoring?What is profit laundering?How much profit laundering is there?What is Tax competition and why is it bad?Where did the idea of tax competition come from?How did tax avoidance come about in the first place and who are the main actors?Tax avoidance undermines capitalismTax avoidance undermines democracyTax Shelters and Avoidance in the USThe scale of the problemWhy a rise in tax shelters in the 1990s?Corporations manage to reduce their tax burdenPowerful interests minimize Congress’s chance of tough actionSheer amount of money involved implies problem will remainTransfer Pricing — Intercepting WealthPrivatizing profits, socializing costsTackling the problem, or pretending to do so?Rich country governments finally acting because it now affects them?More InformationCorporate WelfareCorporations and corporate-funded think tanks, media and other institutions are often the ones that loudly cry at the shame of welfare and the sin of living off the government and how various social programs should be cut back due to their costs. What is less discussed though is the amount of welfare that corporations receive.Corporate welfare is the break that corporations get both legally and illegally through things like subsidies, government (i.e. public) bailouts, tax incentives and so on. Corporations can influence various governments to foster a more favorable environment for them to invest in. Often, under the threat of moving elsewhere, poorer countries are forced to lower or even nearly eliminate certain corporate taxes to these large foreign investors.This distorts markets in favor of the big players. As such influence spreads globally, it contributes to a form of globalization that seems less like true free market capitalism that they talk of, but more like a modern form of the unequal mercantilism that prevailed during colonial and imperial times.Back to topCorporate CrimeWhen we talk about crime, we think of the violations of law caused by individuals, some of which are horrendous. However, almost rarely talked about (especially in corporate-owned media) is the level of crime caused by corporations. Such crime includes evasion of taxes, fraud, ignoring environmental regulations, violating labor rights, supporting military and other oppressive regimes to prevent dissent from workers, including violent crime against workers, and so on.In the US, for example, back in the mid-1990s it was estimated that corporate crime cost the country about $200 billion a year.Side noteSince writing the above two paragraphs originally when this page was created, the issue of corporate crime, in the U.S. particularly has taken on a whole new dimension. Events after September 11, 2001, have highlighted massive corporate failures and controversies all the way up to the President. While for now it is beyond the scope of this page to discuss all those issues (though some points are made below, as well as additional links), Benjamin Barber, professor of Political Philosophy is worth quoting, as he highlights an important issues:But business malfeasance … arises from a failure of the instruments of democracy, which have been weakened by three decades of market fundamentalism, privatization ideology and resentment of government.… The truth is that runaway capitalists, environmental know-nothings, irresponsible accountants, amoral drug runners and antimodern terrorists all flourish because we have diminished the power of the public sphere. By privatizing government functions and refusing to help create democratic institutions of global governance, America has relinquished its authority to control these forces.Benjamin R. Barber, A Failure of Democracy, Not Capitalism, New York Times, July 29, 2002Barber is highlighting that even in the most freest of societies, the United States, corporate influences have been so strong as to undermine fundamental democratic principles.Before and since September 11, various companies and ordinary employees, shareholders and others have suffered because of accounting irregularities being highlighted, that showed that inflated stocks and other estimates of the company’s status were seriously wrong. More than just a few rotten apples that various economists and business elite tried to describe as the cause, is the system itself. As the previous link also points out, the systemic problems had long contributed to inequality and other problems, but now that even other aspects are being affected, it is now highlighting the deeper problems even more:The crisis is not the result of a few bad apples. The entire barrel is rotten. In this case, the barrel is the framework of rules and regulations for business. Not every executive is a fraud or cheat, but if the system permits cooking the books, defrauding investors, overcompensating executives, rigging prices, polluting the environment, breaking unions and abusing workers, then it puts pressure on every business to move in those directions. The failures of the much-vaunted U.S. model of deregulated cowboy capitalism were already evident in growing inequality and insecurity and a declining quality of life. Now even much of the positive side – growth, profits, new businesses, productivity, soaring stock markets – has been called into question as an accounting chimera. It’s time to question the whole model – lock, stock and barrel.David Moberg, 10 Lessons from the Corporate Collapse, In These Times, August 16, 2002Back to topTax AvoidanceTax avoidance is sometimes differentiated from tax evasion. Avoidance often applies to legal means (such as loopholes and clever accounting techniques) to avoid paying the full amount of tax, whereas evasion is often applied to more criminal forms of not paying tax.As tax expert Richard Murphy notes , tax evasion and tax avoidance can happen on the same transaction for different taxes in different places and often involve elaborate trails involving more than one person, company or organization.Side noteIn reality it can be more complicated. For example, some regimes (legitimate or not) may try to extract taxes for questionable purposes and some people may object (often unsuccessfully) to their money being used for such purposes. History suggests that if a population is pushed too far, revolts can be violent. Many empires in the past have used taxes as one of many ways to extract wealth away from those they have subjugated to either enrich themselves or fund other projects, such as wars, in other parts of the world. In these cases, tax issues takes on additional dimensions.This article, however, does not go into those aspects; instead, it looks at issues of corporations and others avoiding paying taxes that they would normally be expected to pay because everyone else in that society does. This can be through clever mechanisms and loopholes in the law, or through the use of tax havens, shell companies, and more.The scale of tax avoidanceThrough offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses.For example, in 2000, Oxfam made a conservative estimate that tax havens had contributed to revenue losses for developing countries of at least US$50 billion a year. Side NoteAnd they stress that this is a conservative estimate as it did not take into account outright tax evasion, corporate practices such as transfer pricing, or the use of havens to under-report profit.Individuals too…

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